Private homebuilders across the nation registered far better-than-seasonal new-home demand this past November and December. Nonetheless, an already tight spigot of access to capital to replenish and add to their land supplies squeezed even tighter.

Throughout 2023 – and especially after higher interest rates in early 2023 triggered a cascade of big regional bank failures, intensified Federal agency regulatory oversight, and shrank banks' capacity for financial risk in their current and future books of business among residential development borrowers – privately held operators felt a vise-grip on their access to capital even as an ongoing pull of new home demand promised to expand well into 2024 and beyond.

This tantalizing good-news-bad-news dynamic shows little sign of easing. Aggressive Fed tightening policy and a lack of credit have pushed lending rates to the highest levels since the Global Financial Crisis (GFC). Despite a recent wave of optimism, mixed signals remain on whether and when the Federal Reserve may start loosening the reins on its funds rate, money supply, and ultimately, borrowing power among private homebuilders and their partners.

Robert Dietz, National Association of Home Builders chief economist, offers this visual of FDIC-insured institutions' loan trends.

Dietz's commentary underscores the impacts of the decline in traditional lending activity for acquisition, development, and construction finance among residential developers and builders:

Lending remains much reduced from years past. The current amount of existing residential AD&C loans now stands 51% lower than the peak level of residential construction lending of $204 billion reached during the first quarter of 2008. Alternative sources of financing, including equity partners, have supplemented this capital market in recent years.

The FDIC data reveal that the total decline from peak lending for home building construction loans continues to exceed that of other AD&C loans (nonresidential, land development, and multifamily)." – Eye On Housing

As Dietz notes, "alternative sources of financing, including equity partners" surfaced to fill some of that gaping hole in builders' and developers' lifelines to A&D capital.

At the very top of the pyramid among those alternative sources – particularly for acquisition and development capital – the Builder Advisor Group affiliated lending platform, Avila Real Estate Capital (AREC) originated over $700 million in A&D loans since its late 2022 genesis.

The unparalleled blend of our ability to raise and deploy capital and our operational experience and trusted relationships put us in a unique position to become a lending volume leader in A&D in the past 12 months," Tony Avila, founder and CEO of AREC and Builder Advisor Group, a supporting partner of The Builder's Daily. "We not only came close to $800 million in deals, our deep operational knowledge and network allowed us to finalized those loans within an average of 60 days."

The Builder's Daily reported earlier on several of the key 2023 transactions, including the single largest A&D loan closing of the year, the August 2023, $362 million first-lien loan, with AREC as the lead lender for the purchase of Mountain House, a crown jewel Northern California master-planned community's remaining assets.

Despite the scale and complexity of the project, our affiliate demonstrated its ability to move quickly and close the very large loan within two months," Avila told us on the heels of the deal.

Among the other highlights of the AREC team's 2023 scorecard include:

• In December, we reported that Builder Advisor Group announced its affiliate – One Lake's lead developer Walnut Creek, CA-based McKinley Partners – closed a $70 million first-lien loan as the lead lender for One Lake. The loan is being utilized to replace Trez Capital as the previous lender and finance the development of more than 1,400 entitled and partially developed lots.
• In November, TBD had this story on Triad, N.C.-based LeoTerra Development, led by founder and president Buddy Lyons, turned to AREC for an $11 million first-lien loan that enabled it to refinance LeoTerra's stake in a 254-lot Raleigh, N.C., community it was developing for D.R. Horton.
• A September story spotlighted the AREC team's middle-man role in a win-win-win that added optionality and a cash runway to Raleigh, N.C.-based Glenwood Homes and provided needed finished and unfinished lot inventory feed LGI Homes' expansion in the market.

As the only investment bank dedicated to the homebuilding industry, we take pride in working with our clients to navigate volatility and creating tailored approaches to help them achieve their goals," Avila says.

Speed, agility, creativity, the ability to green-light capital, and clear-sightedness of the outcomes – all essential in an environment defined by a higher-for-longer interest rate backdrop, as well as volatility and an accelerated, real-time demand on nimbleness – have become hallmarks of the AREC, Builder Advisor Group, and Encore team engagements over the years, and now more than ever.

After the financial crisis of 2008, you had a lot of banks and lenders that left the residential development space altogether, and a lot of them didn't re-enter it," LeoTerra's Buddy Lyons told us. "There is already a very limited number of traditional lenders to borrow within this space. As a company, we've found that private lenders and private credit fill a niche for us and other organizations like ours. We use a fair amount of private credit and private lenders and Builder Advisor Group is a class organization. They're great to work with, well-capitalized, and a very good fit for this project."

Steve Riter, a Founding Principal at McKinley Partners, speaks also of a deep well of trusted-relationships capital that comes to bear when the AREC team works through a maze of complexities toward a solution.

We had some unresolved issues with our seller that had to be taken care of, and we were at the 11th hour on those," said Riter. "The Encore team became very flexible in allowing us to facilitate a transaction, with some covenants that we have in terms of LTVs and things like that. So we were able to successfully negotiate with the seller, and get it resolved and closed just at the 11th hour. In the meantime, we were successful in getting Lennar to acquire 131 lots with the prior lender. Encore was creative enabling us to get through these tricky transactions. And then they were also astute in understanding the entire cost to deliver the balance of the project."

Many of those relationships – among builders, developers, capital and investment partners, even planning and regulatory officials in localities across the country – date back decades.

I've had a 20-plus-year relationship with Tony Avila," says Gary Tesch, a Regional President at Texas-based Coventry Homes, a Dream Finders Homes company. "He's always been a tremendous resource for a builder. He knows the builders, the capital partners – he knows everybody in our industry. We had a specific MPC land deal in Rockwall in North Dallas that we were a partner in, and with the market changing so fast, the development rules changing, and the costs rising, Tony and the AREC team came into the challenge. We were a significant partner and a mezzanine lender to the project. AREC was able to come in and do a refinance that satisfied the main ownership group. They understood the time constraints and the maturities, and they gave us flexibility on the maturities. That flexibility was beneficial given the unique situation that we had – the deal had more hair to it that we had to work through. Tony understood it and was able to help structure something that worked for all parties."

Tesch, Riter, Lyons, and others attest to the value of a time- and market-tested, holistic capital and business knowledge base the BAG, Encore, and AREC platforms activate on their behalf, tailored to situations, submarket nuances, and Swiss-precision timing. Some longtime business partners, such as LGI Homes CEO Eric Lipar, who's worked with the Avila-led teams since 2010, tap into opportunities on land acquisition, M&A acquisitions, lot take-downs, even – recently – LGI's own investment strategies.

We had an opportunity as an investor in the AREC debt funds and we see it as providing a solution to a need in the market that has also allowed us to generate a strong return on the investment to our shareholders," says Lipar. "The funds fill a void, and we're excited by the results we're seeing in how they fill that need."